Morning Report
Today's economic developments and market movements.
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Key themes: It was a case of two steps forward one step back for markets overnight with equities pulling back, bond yields drifting higher and the US dollar firming.
A lack of top-tier economic data left investors to ponder on the sustainability of recent moves. It’s unlikely the slight reversal in recent price action is a sign of a broader shift in sentiment but rather a timely consolidation after markets recalibrated following the Fed’s own ‘recalibration’.
There were no signs that anounced policy support in China spilt over to markets outside of Asia. Likely because the stimulus does little to address underlying structural challenges, that’s not to say the boost to liquidity will not be significant.
Share markets: The S&P 500 finished down 0.2% after nothcing up a fresh record high earlier in the session. The Dow Jones also lost ground, shedding 0.7%, while the NASDAQ bucked the trend to finish flat.
Equities also retreated in Europe with the Euro Stoxx 50 dropping 0.5%, UK’s FTSE 100 down 0.2% and the German Dax losing 0.4%.
Stocks were mixed in the Asian session yesterday. The ASX 200 and Japan’s Nikkei both edged down 0.2%. Further policy support for the Chinese economy helped the CSI 300 to a 1.5% gain, extending on a whopping 4.3% jump in the prior session. The onshore benchmark in Shanghai has now almost fully erased its previous year to date losses.
Interest rates: US 2-year treasuries round-tripped with yields initially falling to fresh 2-year lows of 3.50% before selling off and finishing the day 2 basis points higher at 3.56%. Yields continued to firm in the longer tenors, the 10-year and 30-year yields both up 6 basis points to 3.78% and 4.14%, respectively.
The 2-10-year portion of the yield curve continued to steepen, adding another 4 basis points ro reach a more than 2-year high of 22 basis points. Since troughing in late June the 2-10-year curve has steepened over 70 basis points.
There remains a further 75 basis points of Fed rate cuts priced into the front end of the US yield curve this year.
Yield curves were higher and marginally steeper in Europe with yields 1-7 basis points higher across the curve in the UK and Germany.
Aussie bond futures sold off (i.e. yields rose), extending yesterday’s move in physical trade. The 3-year futures yield rose 5 basis points to 3.43%, while the 10-year futures yield was up 4 basis points to 3.97%.
Cash rate futures are pricing in around a 70% chance of an RBA rate cut this year with a 25-basis point cut fully priced in by February 2025.
Foreign exchange: The US dollar firmed against every G10 currency yesterday, partly retracing its recent moves lower. The DXY index bounced off a low of 100.22 before jumping to an intra-day high of 100.99. At the time of writing the DXY was trading around 100.92.
In question will be whether the move is a heathly consolidation of the US dollars recent weakness or a more concrete shift in sentiment. We lean more towards the former, though there is further headroom for the Greenback given pricing for rate cuts is looking a little extended. Comments from Jerome Powell tonight will likely provide the near-term steer on the US dollar.
The Aussie dollar breached 69 cents yesterday for the first time since early 2023, touching a high of 0.6908. But the AUD/USD fully retraced the move overnight on the back of a stronger US dollar to trade back around 0.6823 at the time of writing. The Aussie dollar does appear to be on a more solid footing with stimulus from China likely capping the downside risks to key commodity prices despite falling short of addressing deeper structural issues. Steadfast guidance from the RBA that rates aren’t coming down in the immediate future will continue to support the Aussie’s yield credentials. The key risk likely sits with broader risk sentiment as investors disentangle the scale of the slowdown in the US economy.
The Japanese Yen extended a broader softening trend against the US dollar. The USD/JPY was trading around 144.68 in early trade this morning and is up almost 5 big figures in just under two weeks, even against the backdrop of a softer US dollar. While the fortuitous cycle of higher wages and prices appears to be gaining further momentum, Bank of Japan policymakers a wary of blowing out the embers and continue to err on the patient side as they withdraw accomodative policy.
The euro and the British Pound were both softer against the Greenback trading around 1.1131 and 1.3320, respectively, in early trade this morning. The broader upwswing in the Sterling remains in-tact despite the overnight pullback, though price action is likely to be dictated by the US dollar leg with the Bank of England holding steady with a gradual approach to policy easing. The same rings true for the euro which has been stuck in the 1.10 to 1.12 range for the past month or so.
Commodities: US crude inventories fell 4.47 million barrels last week to the lowest since April 2022, Energy Information Administration (EIA) data showed. However, oil prices plunged on news that Libyan factions reached a “compromise” on appointing new leadership to its central bank, an initial step that could help eventually return some of the countries oil supply to the market. West Texas Intermediate (WTI) oil futures dropped 2.6% to US$69.69 per barrel.
Iron ore continued its rebound on the announcement of further policy support in China. Iron ore futures in Singapore spiked to a high of US$99.25 yesterday before pulling back to close at US$96.48, up 1.8% on the previous sessions close.
Australia: Annual growth in the monthly consumer price index (CPI) indicator showed a significant step down, moderating to 2.7% in August from 3.5% in July. This was the lowest reading since August 2021.
The fall in electricity prices stole the show, down 17.6% over the year to August - the steepest fall in history. Commonwealth Energy Bill Relief Fund rebates and state government rebates in Queensland, Western Australia and Tasmania combined to deliver this historic fall. Without the rebates, electricity prices would have risen 0.1% in annual terms.
There were some positive signs for inflation, but the RBA Governor’s guidance was clear – the RBA Board is looking through the month-to-month volatility to the underlying measures and we will get a fuller picture when we receive the September quarter CPI.
China: The People’s Bank of China (PBoC) lowered the interest rate charged on its one-year policy loans by the most on record. The 30 basis point cut reduced the medium-term lending facility to 2.0%, as widely expected.
The reduction in the lending rate is part of a broader program to revive confidence in the world’s second-largest economy after Governor Pan Gongsheng’s announcement the previous day of a broad stimulus package.
United States: New home sales reversed course again in August, declining 4.7% after a 10.3% rise in July. Sales are currently 32% higher than the cycle low of mid-2022 and are likely lift further as interest rates fall, assuming the labour market remains in robust health. Across the US, there is considerable demand for new home supply.
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